Unallotment II: The rematch

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The Supremes have spoken. So now what?

Wednesday’s Minnesota Supreme Court decision invalidating the one-man, $2.7 billion budget-balancing act undertaken last year by Gov. Tim Pawlenty left Democrats cheering and Republicans sniping, but the reaction was richly bipartisan in another sense: Everyone began scrambling to figure out what has to happen next and what the broader repercussions might be.

Both parties and their elected principals have plenty of reasons to do a timely budget fix. But getting it accomplished in the scant few days that remain before the Legislature adjourns may or may not prove possible. Beyond the financial exercise of balancing the books, myriad political calculations are being weighed.

Here’s a quick spin through some of the conversations that have been happening at the Capitol in recent days, starting with dollars-and-cents issues and proceeding to the politics.

Budget ramifications: Despite the ostensibly limited scope of the court decision (whose lone point of reference was a single $5.3 million nutrition program), all parties are treating it as a de facto reversal of the entire package of Pawlenty cuts. But for practical purposes, that doesn’t mean that the whole $2.7 billion lands back on the books as added near-term deficit. The governor’s school aid shift, which accounts for two-thirds of his total cuts, can be legislatively ratified without adding any immediate spending obligations. Presuming that happens, it appears that Pawlenty’s estimate of the other cuts put back in play — about $700 million — is close to the mark.

It breaks down roughly this way:

• The $1.2 billion K-12 payment shift can and likely will be codified by the Legislature; even prior to the decision, it was already part of the House omnibus K-12 finance bill. A legislatively passed shift would not create any additional near-term spending — which is another way of saying it would provide no immediate relief to schools. But it would legally guarantee eventual repayment, and that’s a small boon to districts forced to do short-term borrowing, since the guarantee may allow them to secure better terms when they seek those loans.
• The $600 million property tax recognition shift that comprised the last third of Pawlenty’s $1.8 billion shift package was really an administrative rules change that permanently moved up the date when districts can begin drawing upon property tax receipts. But according to one legislative fiscal analyst, the Legislature still must act to codify cuts in fiscal year 2011 payments to schools in order to realize the associated savings to the state general fund.
• Another $200 million, give or take, consists of other payment delays and executive orders that were not unallotments. These include the proceeds from actions such as canceling the tax reciprocity agreement with Wisconsin and delaying the payment of some tax refunds.

The items listed above come to roughly $2 billion, leaving another $700 million or so in unallotment cuts for the Legislature to ratify or to solve through fresh cuts to other parts of the budget.

On Wednesday a lot of people were wondering aloud if a failure to fix the problem by the constitutionally mandated session adjournment date of May 17 would result in a government shutdown. A DFL legislative staffer told us the answer is no: Shutdowns happen when no money has been appropriated to keep government ops running. In this case, the money has been appropriated. The problem is that there would be no funds to make good on the spending commitments. And so, said the staffer, the state would be facing bankruptcy rather than shutdown.

Cash flow: For months, officials from Pawlenty’s department of management and budget (MMB) have conceded that the state is dancing on the rim of a dire cash-flow problem that would force Minnesota to do short-term borrowing just to keep the lights on. Administrative payment delays (mainly to school districts and university systems) got them through a rough patch this spring, but current projections show a long series of monthly cash-flow deficits starting in September 2010. (You can see the details on page 7 of this April 12 MMB presentation [PDF].)

Depending on how — and how quickly — the Legislature and the governor’s office dispose of the unallotment cuts that have yet to take effect, that cash picture could change for the worse, deepening the fall 2010 gap or forcing the state to borrow sooner than presently anticipated.

On Thursday, MMB Commissioner Tom Hanson told PIM/Cap Report, “It’s a pressing cash problem. If your refrigerator goes out and it costs $1,000 to repair, and you’ve only got $300 in your checking account, then you’ve got a cash flow problem. And it’s no immediate help that you will have the means to pay for it eventually.

“Blinking on [i.e., reinstating] all those unallotments would put the state in a similar situation. That would be very dicey and difficult.”

Of course, no one thinks simply reinstating those funds is an option. According to a nonpartisan legislative fiscal staffer, the cash-flow implications of rejiggering the menu of budget cuts are likely to be minimal. They start at zero in a scenario where the Legislature simply ratifies the Pawlenty cuts (since current cash-flow projections include those cuts). Adopting a slightly different set of cuts would probably have little impact on cash flow as long as the timing of the state expenditures involved was relatively the same.

The only obvious scenario in which there are major cash-flow implications is a lengthy special session that threatens to carry into the next fiscal year, which starts on July 1, without adopting substantial cuts. But that’s extremely unlikely given the high stakes for both sides.

Minnesota‘s credit rating: The state was skating on thin ice in the eyes of ratings agencies well before the unallotment decision. Back in February, Moody’s downgraded the state’s outlook to negative. And they offered the following elaboration on their worries (emphasis added):

“What could change the rating down?

• “Continued reliance on one-time solutions to solve recurring budget shortfalls
• “A fundamental negative change in the state’s economy compared to the nation
• “Significantly strained liquidity
• “Multiple years of negative GAAP [generally accepted accounting principles] fund balances
• “Absence of a plan to budget without the benefit of federal fiscal stimulus”

If the budgetary fallout from the unallotment ruling isn’t dealt with neatly and quickly, it will make the ratings houses even glummer. They regard special sessions as a red flag on the grounds that a failure to finish on time demonstrates a lack of coherence and agreement in budgeting. And as MMB’s own credit markets expert, Kathy Kardell, has testified before the Legislature, any short-term borrowing for operations could well lead to a ratings downgrade.

Special session?: When the possibility of overtime looms at the Legislature, it’s usually accompanied by the prospect of political gain for one side. Not this time. Pawlenty wants the Legislature to finish on time for immediate as well as long-term reasons. And the Legislature wants out as well. Both parties’ gubernatorial endorsees are in the Legislature, and they are itching to start campaigning full-time, as are their colleagues. All 201 House and Senate seats are on the ballot this fall.

Democrats seem genuinely optimistic about getting done by May 17, in part because they think Pawlenty’s loss at the hands of the Supremes has given him fresh incentive to negotiate in earnest. “If the next 11 days don’t go well, then we could end up doing a special session,” a senior House staffer said late Wednesday. “But I don’t think that will happen, because for once [Pawlenty] is likelier than not to do a deal.”

Pawlenty 2012: Pawlenty’s all-but-official campaign to be the next Republican presidential nominee is one of the chief reasons he needs a fast budget deal. It’s entirely conceivable that the whole episode will prove invisible nationally, but that depends on the outcome. It’s hard to see how any protracted fight with messy public consequences could fail to turn into a cudgel for Pawlenty’s GOP presidential rivals.

Kelliher 2010: Pawlenty isn’t the only one at political risk as the unallotment showdown nears its conclusion. House Speaker and DFL gubernatorial endorsee Margaret Anderson Kelliher could be hurt by a messy denouement too. Kelliher is closely identified with the lawsuit that toppled Pawlenty’s budget fixes. Last summer she attended a series of meetings with various affected parties that were viewed in part as screenings of potential legal challengers, and she led the push for the House DFL to file a friend-of-the-court brief on behalf of the plaintiffs.

The DFLers we’ve spoken to in the past couple of days have universally praised Kelliher for being on the side of the angels in an important battle over executive budget-making powers. But many also recognize the potential for political damage of the pox-on-both-your-houses variety if the budget cleanup goes awry.

Political analyst David Schultz goes so far as to argue Kelliher will be hurt no matter what happens. He told PIM/CR’s Paul Demko, “Margaret Anderson Kelliher is the poster child for the Legislature. What are her options? If they basically ratify unallotment, you politically tick off lots of people. If you change and say we’re going to gore different people instead, you run the risk of alienating those people instead. Basically the governor can just say, ‘This is your problem to solve, but I’m not going to raise taxes. Send me a balanced budget.’

“I think, in many ways, that while the governor has lost legally, the Democrats and Margaret Kelliher have lost huge politically on this one.”

(Note, however, that Schultz’s scenario presumes that Pawlenty will play it intransigent and try to put the ball entirely in Kelliher’s hands. He has his own reasons to think twice before doing that.)

A more immediate issue is whether Kelliher now retains her speakership through the remainder of the session — and (trickier) any special session that might follow. Just a few weeks ago, it looked like a smooth ride to May 17, with just $155 million in remaining deficits to solve. Then it became apparent that $408 million in federal FMAP dollars were unlikely to arrive on time. And then, the unallotment deluge.

Some Democrats we talked to seem to think it’s possible, if unlikely, that Kelliher will still opt to step down before session’s end. But how could she possibly couch that so as to avoid charges of ducking and running? Her last clean opportunity to shed her leadership role was right after securing the endorsement. Her next chance will be prior to a special session if one proves necessary. But that would be tough to pull off in the middle of a fight. For practical purposes, it really looks like Kelliher is stuck driving the bus for the duration. And that’s probably still the way she wants it.